Amazon Fresh: One Guaranteed Winner, But Many Potential Losers

Amazon (NASDAQ:AMZN) is not afraid to rock the proverbial boat, and the latest announcement by the company is no different. Amazon has been testing a same-day grocery delivery service in Seattle for many years now called Amazon Fresh. The company formally announced this week, after months of rumors that it would be expanding the service to Los Angeles. For $299 annually, consumers in Los Angeles can now have groceries (and other household items) delivered to their home via same-day delivery. There are plenty of detractors who think this concept will never work, and there are plenty who have tried and failed to crack the online grocery business.

Comparing Amazon to any company that has previously taken a crack at this market is downright silly. Amazon has the resources, both financially and from an infrastructure standpoint, to make same-day grocery delivery successful. The key here is defining success. All companies that have attempted to crack the code for an Internet platform built to support the ordering and home delivery of groceries had one important item in common: They had to figure out how to make money from the venture. Amazon does not have that same problem, and most likely anticipates actually losing money or breaking even at best from Amazon Fresh. While Amazon may not stand to profit directly from Amazon Fresh, the ancillary benefits to the company are numerous. On the flip side, there are other retailers who could see significant risks in the event Amazon is successful with this concept and expands it to other major markets around the country.

Why Amazon Could Succeed Where Others Have Failed

The beauty of the Amazon model is that it can afford to not make money on this service. No other company that has ever attempted to enter this market had that same luxury. The benefits for Amazon are numerous and will be discussed in more detail throughout this article. The important item for investors to note is how Amazon Fresh is another example of Amazon expanding a brand that will allow consumers to purchase almost anything they need, while encroaching on the last line of defense that hardline retailers had against Amazon: Being able to provide goods immediately. If Amazon can solve this equation and figure out a way to break even in the service of delivering groceries on a same-day basis, the repercussions across the grocery and retail industry are monumental.

Implications for Hardline Retailers and Grocery Store Chains

The implications for major grocery chains should be obvious and scary. At best, they may be forced to compete on price in an already razor-thin margin business. The two mega companies with the most to lose if Amazon is successful in this endeavor are Wal-Mart (NYSE:WMT) and Target (NYSE:TGT). Ask yourself about the biggest change you have seen at your local Wal-Mart and Target stores over the last few years. The answer should be that these stores have introduced a significant assortment of groceries, including produce and other fresh foods. Earlier in 2013, Target was actively touting its grocery assortment in a national advertising campaign.

The importance of groceries to the business model for both Target and Wal-Mart should be simple to understand. It provides a product that consumers need on a daily and weekly basis, bringing bodies into the stores, and hopefully generating ancillary sales on top of the low margin grocery and food items. This is the biggest competitive advantage these stores retain over Amazon. The ability to provide goods that a consumer needs immediately. What happens if Amazon takes away that competitive advantage?

Defining Success for Amazon and Its Likelihood

If Amazon can break even with Amazon Fresh, the company will succeed. No ifs, ands, or buts about it. It succeed because it keeps consumers from going to hardline retailers, such as a grocery store or Wal-Mart or Target. As these consumers have one less reason to make a trip to these stores, they also have one less opportunity to make an impulsive purchase or pick up something else they might need while they are out. This allows Amazon to further ingrain itself into the fabric of how consumers purchase goods.

Consider the data mining available to Amazon from this grocery service. Consumers would be able to set up standard deliveries of all the grocery items they need for that week, and have them delivered the same day each week. Amazon would be able to aggregate this data, and begin to offer targeted sales or suggestions based on past purchasing history. Your grocery store has no idea what you bought the last time you were there. Amazon would be able to remind consumers that it is time to reorder certain products, and suggest complementary ones based on past purchasing history. This amount of data will be a gold mine for Amazon's ability to micro-target consumers.

The biggest question might be whether consumers would be willing to pay $299 for the service. I don't even think this is a question at all. Consider that over 10 million people are already reported as being Amazon Prime members, paying $79 annually for free two-day delivery. It really all comes down to how you value the Amazon experience as a whole, and how you value your time, as to whether or not $299 a year is a price consumers will pay. There are a few ways to rationalize the $299 per year cost. The first is to put a value on the time spent traversing to the grocery store. It probably goes without saying that most Americans travel to the grocery store at least one time a week. Using that analogy, a consumer would be paying $5.75 a week over the course of the year, assuming that Amazon Fresh takes the place of the weekly grocery trip.

I doubt anyone could argue that the 30- to 60-minute experience of traveling to a grocery store and actually buying groceries is worth less than $5.75 a week in terms of the time value of money equation. The second way to rationalize the $299 annual fee is in terms of what you also get with it. For $79 as an Amazon prime member, you get free two-day shipping and what will soon enough be the equivalent of a Netflix (NASDAQ:NFLX) type of video streaming service (as a throw in). To argue that paying $220 a year, which is the additional cost on top of Prime, would be a huge impediment is not grounded in reality.

Winners, Losers, and Investment Takeaway

As I alluded to in the title of this article, there is only one guaranteed winner if Amazon Fresh succeeds: the consumer. Be it in the form of having access to same-day grocery delivery or from the competition having to lower prices to maintain a value proposition over Amazon, it is a guarantee that consumers will win if Amazon succeeds. The losers are companies that carry an assortment of groceries meant to offer consumers the convenience and immediate access to these products, as a means of driving traffic into their stores in hopes of additional higher-margin purchases. The grocery stores are obvious losers, and Wal-Mart and Target are probably the biggest companies that do not immediately come to mind, but have the most to lose from this venture succeeding.

As for Amazon, it is not a cut-and-dried case. This is certainly not a reason to rush out and buy Amazon stock. Amazon Fresh will only work in densely populated areas of the country, and the scope of this program will thus be limited compared to the ability of Amazon to offer free two-day delivery on its other products nationwide through Prime. The company already has the infrastructure in place to offer this service, which leaves little downside risk if it doesn't succeed. The upside will be gradual, in line with how quickly Amazon expands the service, and whether or not it succeeds in further changing consumer spending behavior. You can bet Wal-Mart and Target will be watching this carefully, with the fear of what might happen if Amazon knocks down one of the last competitive advantages these companies have.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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